A Blog by Jonathan Low


Jun 3, 2018

Why the Future of Big Tech's Impact On the Economy May Now Be Visible In China

Two Chinese companies, Tencent and Alibaba, are becoming the gatekeepers to the entire economy and are doing so with the government's tacit approval. That outcome may not be so farfetched for the US as some would like to believe. JL

Raymond Zhong reports in the New York Times:

China offers a vision of the future, in which online behemoths like Tencent and Alibaba become the gatekeepers to the entire economy, wielding immense power over traditional industries. Once the companies have locked people into their payment systems, they become the enablers of commerce and financial services. “The China internet market is way more competitive than the U.S. market. Everyone is trying to expand in every sector.” Google and Facebook could soon be forced to find ways to make money beyond selling users’ personal information to advertisers.
Forget Google versus Facebook. Forget Uber versus Lyft. Forget Amazon versus … well, everybody.
The technology world’s most bruising battle for supremacy is taking place in China. And it could point to Big Tech’s future everywhere else, too.
Tencent Holdings and the Alibaba Group are ratcheting up their no-holds-barred contest to dominate the ways 770 million internet users communicate, shop, get around, entertain themselves and even invest their savings and visit the doctor.
The two titans long ago branched out from their core businesses — games and social media for Tencent, e-commerce for Alibaba — to duke it out in ever more realms of Chinese life. They have competed in messaging, microblogging and delivering takeout. They go head-to-head in video streaming and cloud computing.

Today, their fiercest fight is over digital money kept on smartphones. Mobile payments have transformed the Chinese economy. Both giants, plus Ant Financial, an Alibaba sister firm, are spending big to gobble up pieces of the action.
China’s internet powerhouses stand at the forefront of the nation’s galloping high-tech progress — a surge that has been brought into sharp focus by the Trump administration’s efforts to counter it. On one hand, the standoff over the Chinese telecom equipment maker ZTE has exposed, to many in China, the degree to which the country still lags in core technologies such as microchips.
But in the internet realm, China still offers a spooky potential vision of the future, one in which online behemoths like Tencent and Alibaba become the gatekeepers to the entire economy, wielding immense power over traditional industries and becoming very, very rich in the process.
At a conference in December in the Chinese city of Guangzhou, Tencent’s chief executive, Pony Ma, said he felt that the two companies were competing in “too many” areas.“Sometimes I think, ‘Ah, we’re competing in this now, too? All right then,’” Mr. Ma said, chuckling. “It’s a little frustrating.”
A duopoly this broad could not be easily replicated in the United States. Entrenched competitors and the threat of government intervention generally keep the likes of Apple, Amazon, Google and Facebook from expanding pell-mell into adjacent businesses. All of them have sprawled and overlapped mightily, but Amazon, with its forays into groceries, pharmacies, health care and more, might be the furthest along toward creating an inescapable commercial universe.
Still, with the European Union enacting tough new privacy laws, and some in the United States eager to follow, Google and Facebook could soon be forced to find ways to make money beyond selling users’ personal information to advertisers, said Raj Rajgopal, president of digital business strategy at Virtusa Corporation, a consulting firm.
“As profitability reduces, they’ll say, ‘Now I need to monetize my customer base,’” Mr. Rajgopal said. “The innovation we’re seeing in China could be seen in the U.S. in the next three to five years,” he added. “Customers are demanding that.”
China’s internet titans have a powerful ally found nowhere else, though: the Chinese government. Tencent and Alibaba have avoided antimonopoly clampdowns by staying in Beijing’s good graces, said Hu Wenyou, a partner at the Beijing law firm Yingke. Their sheer size also makes them easier for the authorities to control. They simply have too much to lose.
“If you can become so big, and so successful in so many areas, this in itself shows that you must have maintained very good, very friendly relations with the government,” Mr. Hu said.
Neither giant is done getting bigger.
Each has a market capitalization of close to $500 billion, making them among the most highly valued technology firms on the planet. Google and Facebook still claim more users, but the Chinese heavyweights arguably do more — and more, and more — for theirs.

They have both funded ventures that offer online education, make electric cars and rent out bicycles. For the giants, such initiatives represent new opportunities for people to use their digital wallets — Ant Financial’s Alipay and Tencent’s WeChat Pay — and new ways to collect data on consumer behavior. Analysts at Sanford C. Bernstein counted 247 investment deals by Tencent in recent years and 156 by Alibaba, though given the pace of the companies’ deal-making, they said their database was “likely to be perennially incomplete.”
The latest battleground? Brick-and-mortar stores. Alibaba has spent great sums — $2.9 billion on a supermarket chain, $2.6 billion on a department store and mall operator — to conquer the real world. Tencent has followed suit with its own retail partnerships and investments. Walmart recently said it would no longer accept Alipay in its stores in western China, in a victory for Tencent.
Once the companies have locked people into their payment systems, they can become the enablers of commerce and financial services of even more kinds. In a sign of investors’ excitement about the possibilities, Ant Financial is making plans to go public, in a blockbuster stock offering that could give the company a market value larger than Goldman Sachs’s.
China has become a model for tech’s world-swallowing tendencies partly out of circumstance.
With the country’s high-speed churn of well-funded start-ups, planting flags on new turf is often the only way for large players not to be constantly losing ground.

A “big data” expo this week in Guiyang, China. Given the high-speed churn of well-funded Chinese start-ups, moving into new sectors is a way for major players like Alibaba and Tencent to keep from losing ground.CreditAleksandar Plavevski/EPA, via Shutterstock

“The whole China internet market is way more competitive than the U.S. market,” said Xiaoyan Wang, an analyst at 86Research in Shanghai. “Everyone is trying to expand their presence in every sector.”
Also, both Alibaba and Tencent have struggled to make much money outside their home market. That means their surest way to keep growing is to get more deeply involved in more areas of their Chinese users’ lives.

Those lives are riper for tech disruption than lives in the West. In China, small stores dominate retail. Hospitals are crowded and doctors overworked. Most people do not have credit cards. These are easier business opportunities for Alibaba and Tencent than they would be for Amazon or Facebook.
In a report this week, Morgan Stanley predicted that by 2027, the total market in China in which Alibaba could be making money will be worth $19 trillion — more than Amazon’s potential market worldwide.
At the moment, both Chinese giants are hustling to find more ways for people to transact using their wallet and not the other’s. Alibaba’s shopping sites and physical stores do not allow users to pay for stuff with WeChat. Tencent-backed companies, such as the retailer JD.com or the service platform Meituan-Dianping, either downplay Alipay as a payment option in their apps or do not accept it at all.
Whether any of this will give either camp an enduring lead in payments is unclear. Eric Wen, the founder of Blue Lotus Research Institute, expects them to end up at roughly 50-50.
The payments contest will at least propel both companies to keep expanding their kingdoms, including overseas. Alibaba is pouring billions of dollars into online shopping ventures in India and Southeast Asia. Tencent is backing start-ups around the world that have even a distant chance of enriching its ecosystem.
George Favvas did not know too much about Tencent before it invested in his company in San Francisco, Circle Medical, whose app lets users summon doctors on demand. He also had no specific plans to take his business to China in the near future, if ever.
“My first question was, ‘Why are you interested in us?’” Mr. Favvas said.
He gets it now, he says. “They’re just such a big player, and health care is so broken,” Mr. Favvas said. Tencent, he added, is interested in health care for the same reasons companies like Amazon and Apple are.
“If anything, they’re a couple of years ahead.”


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